Labour’s come into the hot-seat of Government and is promising some changes. They’re focused on social reform, housing issues, education, health…and tax.
On the tax front, they’re after a tax system where everyone contributes ‘fairly’. Rightly or wrongly, the implication is that the current system isn’t ‘fair’. The view, and again rightly or wrongly, is that everyone isn’t paying their fair share (namely property investors) and that not all income is taxed the same way.
The main changes this Term:
The main things we can expect are:
- Cancelling the tax cuts National had previously legislated for. These were due to kick in on 1 April 2017.
- No increased tax rates, for companies, individuals or trusts. We expect this to be true for their first term, but maybe not for subsequent terms.
- Extending the bright-line test for residential properties from two to five years. This means the profit from selling an investment property is taxed if it’s bought and sold within five years.
- Stopping losses from rental properties offsetting other incomes. In short, the tax refunds people receive from rental properties will go. While the legislation hasn’t been put together, these sorts of bans typically just result in more work for accountants…
Capital Gains Tax:
Labour are also launching a Tax Working Group. This is mainly bluff-and-bluster, and will ultimately see the introduction of a Capital Gains Tax sometime after the 2020 Election. I would expect to see a Capital Gains Tax regardless of who wins power at the 2020 Election.
When introduced, we’d expect a Capital Gains Tax to take a similar form to Australia. This means:
- Your family home is exempt from income tax
- Gains from other properties are taxed, with a significant number of exemptions
- Inheritances aren’t taxed until you sell the property you inherited
- Gains from selling a business are taxed (again, with exemptions…)
- Only gains made from the day the tax comes into force are taxed (historical gains are ‘safe’)
The argument for a Capital Gains Tax goes along the lines of “why should income from employment or business be taxed, while from income selling an investment property isn’t”. There’s also an argument that it helps cool the housing market (even though Australia has Capital Gains Tax and exorbitant house prices).
On the other hand, the argument against goes something like “I’ve already paid Income Tax on the money I earned to buy the investment property – taxing me again on my gain when I sell an investment property is double tax”. There’s also an argument that it encourages people to buy bigger homes for their family home (they’re exempt from the tax), and discourages people from reinvesting in their businesses.
Our two cents are that a Capital Gains Tax isn’t necessarily a bad thing, as long as it’s consistent across different assets (i.e. everything should be subject, or nothing). Exemptions just create more work for accountants…
At the same time, the Capital Gains Tax will be introduced sometime after the current house price peak has dropped off. So, the gains made on the recovery between the (coming) bottom of the market, back up to the top today will be taxed.
There’s a raft of other (largely rats and mice) changes. These include the introduction of:
- Winter Energy Payment (for beneficiaries and superannuates)
- Best Start (to assist with costs during a child’s early years)
- Increases to the length of paid parental leave
- A profit diversion tax to stop multi-nationals shifting profit offshore
- Research and development incentives to give a refundable tax credit for R&D expenditure.
- Regional fuel taxes
- Water taxes on exported bottled water
- A new system to deal with Secondary Tax
The new Government has an ambitious program of changes for its first 100 days. For the last 9 years we’ve had very few changes to the tax regime – it will be interesting to see how the slate of changes impacts the tax regime.
If you’re a betting person, I wouldn’t bet on any significant changes. The media noise will be loud, but the fundamentals won’t move. Exemptions and concessions will mute the impact of the changes.